I have been reading about Municipal Tax Lien sales since my city held their sale last year. This year I decided to register and attend my first tax lien auction. I had identified a few properties on the list of interest with a non-redemption strategy in hopes to initiate foreclosure after the 2 year redemption period, here in New Jersey, thereby acquiring a property or two with future plans to fix and hold or flip, etc. Well, I was definitely out of my league. I know tax lien investing is more of an advanced strategy so I went in only targeting a couple properties, but I wasnt even in the ballpark. Almost every property on the docket went to premium bids, some as high as 10,000 to 47,000 on a 7600 tax lien. You could tell there were experienced "players" in the room with a seemingly endless supply of capital. My question though, is how do these investors "value" the lien and set a limit on how high they are willing to bid? Some properties, that I wasnt as familiar with, went for only a couple hundred to a couple thousand dollars. Where do you experienced Tax Sale investors find value and how can one determine a max bid on lien? Is there a formula or rule of thumb Im not aware of? I was glad I attended for the experience (didnt even make a bid though) and am hoping to be better prepared for next year (or another city). Thanks in advance!
@Daniel Kern it is a humbling experience. We buy a lot of properties in my area at the sheriffs sales and when we first started it was an eye opener. I have since teamed up with a few very good partners. One does the research on the liens. I handle a lot of the evaluation and how much the property is worth and what is the max we can offer. My third partner handles all the back office stuff. Its not a place to start out but a good goal for you to have to maybe play in that market. There are so many other areas to start that I would not suggest this arena. Just not yet.
Thank you @Alex Deacon for the response and I agree that I am not ready for this type of investment strategy, but I wanted to attend to at least have a better understanding of the process. Having a team seems like a naturally good idea in addition to that endless supply of capital. Can you elaborate on how you determine your max offer per lien and how this would be impacted by the value of the property?
I had gone through the whole list and came up with my estimated value of each property I was interested in, but I assume there is a more formalized calculation of Lien Amount to Property Value to Max Bid? I understand these formulas when it comes to property for flips, buy and hold, etc... Just trying to dig through the nuances of tax lien purchases as a potential future investment vehicle. Thanks again for your insight!
I kind of work my way backwards. I take what I feel the ARV will be minus any liens minus Buy, Hold and Sell costs minus estimate for the rehab minus an unknown contingency since most of these you cant get inside the property to look and then minus a reasonable profit margin leaves me with the most I can offer. I hope that is answering your question. I am in Pittsburgh so I dont know if the process is different in your area but sometimes you cant sell the property with good title for up to 1 year so your holding costs can be excessive. You have to be ultra careful because with this length of time holding the property a lot of things can go wrong and the market can change temporarily for the worst due to weather, holidays spike in interest rates, sudden oversupply etc...
Thanks @Alex Deacon for the rough formula, that was very informative and what I was looking for. Would this rough estimate/hypothetical situation make sense to you as far as math goes or are there additional fees and holding costs I'm leaving out? For example...
150k ARV property with 6,000 annual taxes and a 10k tax and sewer lien
150k - 10k lien - 18k (3yr taxes) - 35k rehab - 15k unknown - 40k flip profit - 15k sales cost = 17,000 Max premium bid
Looks reasonable. 40k is a lot of profit. With the competition you may need to work on a little slimmer margins.
Or you stick to your guns and do less deals and more profit margin per deal.
Makes sense to me, just using hypotheticals, on the ideal side I guess, but thank you again. This conversation has been very helpful. I didnt have the nerve to talk to the few "players" at the table this morning after the sale was over, but knew I had a forum to turn to... I appreciate it!
I am also new at getting into Tax Lien and Tax Deed investing. I've been doing a lot of research in this arena. Thanks for the post.
Very informative post. Thank you guys. I learn something new here every day!
What about the liens that are for minimal amounts (say $400 sewer lien) that closed at 0% or only a few hundred dollar premium? These properties still have great ARV after the redemption period but went for much less than other properties where the premium paid was much higher. Is this simply a matter of the bigger players not wasting there time on smaller liens or is there an underlying correlation to the property/likelihood of redemption? I can see hedge funds of private entities not wasting resources on a $400 lien at 5% that's redeemed at only a $20 return.
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